Student debt to stall millennial retirements

By Amy Hoak

Thanks to hefty student loan debts, many millennials will have to wait until 73 to retire, a recent study found. That’s 12 years later than the current average retirement age, 61.

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For them, 73 could be the new 65.

Joseph Egoian, a financial analyst for personal finance website NerdWallet and the author of the study, explains that 73 was the age by which a college graduate with a median amount of student debt and a median starting salary would finally build a big enough retirement portfolio to replace 80% of his peak salary annually. (Also factored in are Social Security benefits beginning at 67, at $11,070 a year.) Read the full report here.

Here’s the problem, according to NerdWallet: The median debt for a student when she graduates is $23,300, and the median starting salary for a recent grad (who has a job) is $45,327. Assuming a student makes the average annual loan payment of $2,858 for the first 10 years of her career, that drastically cuts into the amount of retirement saving she can manage. And figuring that missed-out contributions could have been earning a compounded rate of return until retirement, the lost savings due to student debt payments is $115,096 by age 73, according to the report. The report assumes every loan payment would have gone to retirement savings, and that the graduate would save at the historical 30-year national post-tax savings rate of 6.1% after the debt is paid off, Egoian said.

Obviously, the numbers are a little grimmer for graduates with more debt and a below-average salary. NerdWallet labeled as “struggling graduates” those with $40,000 in debt and a starting salary of $40,000; they wouldn’t be able to retire until 75. That says nothing of those who can’t find work. And more than 7 million college graduates are estimated to be in default on their student loans, according to the study.

For grads defined by NerdWallet as “well off” (the scenario in the report has them coming out of school with $10,000 in debt and a $50,000 salary), the picture is much improved: They’d be able to contribute an extra $40,406 during the first 10 years of their careers, amounting to a $446,452 difference in retirement savings by age 73, compared with the graduate in the median debt/salary scenario. Well-off grads would be able to retire at 67, the eligibility age for full Social Security benefits for Americans born in 1960 or later.

To beat the odds, employer-matched contributions to 401(k) plans are crucial, Egoian said. If possible, workers should make above-average contributions to their retirement savings as soon as they’re able to. Also, it’s necessary to create an equity-oriented portfolio invest in index funds for a market return with low fees, he wrote.

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Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.